When it comes to tax planning, C Corporations have some unique advantages.
Every corporation starts its life as a C Corporation. It is possible to make an election (known as an S Corporation election) to be taxed as a flow-through corporation known as an S Corporation.
A limited liability company (LLC) can elect to be taxed as a C Corporation or an S Corporation.
Let’s assume that you’ve made or not made all the relevant elections and have a legitimate C Corporation.
The C Corporation is the only business structure that pays tax itself. All the others – partnership, S Corporation, Sole Proprietorship – flow their income or expense through to you and/or your partners. You pay tax personally on the business income.
In the case of a C Corporation, the corporation itself pays tax. Your C Corporation could make a fortune and you personally could qualify for food stamps. Not that you would go apply, or even qualify otherwise, but that’s pretty amazing to think about. In the case of a C Corporation, the income or losses of the company are completely separate from you and your taxes.
The C Corporation can have a different year-end than the regular December 31st year-end for S Corporations and most other businesses. That means year-end planning for a C Corporation taxes might be at a different time of the year than you might think. For example, if your business has a year-end of June 30th, you want to start planning by April of that year. The tax return is then due 2 ½ months after the year end, with a 6 month extension possible.
Some of the year-end planning might include:
- Salary and bonuses for employees
- Pension plans
- Benefit plans
Dividends paid by a C Corporation are not deductible by the corporation. These dividends are then taxable by the shareholders who receive them. That’s where the double taxation issue comes from that you might have heard about as an issue for C Corporations. Although your year-end planning may include issuing dividends, it won’t save you anything in taxes.